Life after Default: Private vs. Official Sovereign Debt Restructurings

Abstract

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between private and official deals, as well as between debt flow and stock reduction. Analyzing 520 restructuring episodes, over the period 1975-2013, we find that private and official defaults may have different growth outcomes. Most importantly, controlling for the severity of the debt crisis, we are able to detect a more lasting and negative relationship between default and growth. While private defaults are generally associated with lower growth during the crisis and over the long run (mitigated by the amount involved), for official defaulters we do not observe a growth contraction throughout the years of the crisis and they are associated with higher growth over the long run (independently of the amount involved). When debt relief operations involve debt write offs, however, the negative relationship between private default and growth becomes blurred, while official defaulters strongly benefit in terms of growth from the face value reduction. Using the Synthetic Control Method, we present further evidence for the heterogeneity of the economic impact of debt restructurings, confirming that official and private defaults may have different effects on GDP growth and should then be treated differently.